TORONTO, Dec 19 Canada's economy should finally
ramp up next year following a couple years of sluggish growth,
allowing the Bank of Canada to resume raising interest rates by
late 2013, the International Monetary Fund said on Wednesday.

In a report that warned about the threat to the Canadian
economy from the U.S. "fiscal cliff," a worsening euro zone debt
crisis, and high levels of household debt, the multinational
agency said real economic growth slowed this year, and it
expects it to pick up to just below 2 percent in 2013 and 2.25
percent in 2014.

Next year, the IMF said it expects growth at a pace slightly
above potential from the second half of the year, following more
certainty in the United States, Canada's largest trading
partner, through stronger exports and business investment.

The IMF approved of the Bank of Canada's current
accommodative stance - its key interest rate sits at a
below-inflation 1 percent - and said the next gradual monetary
tightening should start in late 2013, when growth begins to pick
up again.

The report cautioned, however, that "if household imbalances
continue to build up in the context of modest growth, further
macro-prudential measures should be taken into account before
considering an earlier start of monetary tightening."

It welcomed the tighter mortgage rules introduced earlier
this year and said that if the economy were to weaken
significantly, there was still room for further monetary easing.

The IMF's recommendation is similar to the median view in a
recent Reuters poll that expected the Bank of Canada - still the
most hawkish Group of Seven central banks - to resume raising
interest rates in the fourth quarter of 2013.

If the U.S. "fiscal cliff" remains unresolved - which many
economists say could push the United States back into recession
- the IMF estimates that the impact on Canada would be around 75
percent of the effect on the U.S. economy.

On the domestic front, the IMF noted a cooling housing
sector and cautioned that international headwinds for Canada's
exports and commodity-driven economy would be exacerbated by the
high levels of household debt. It warned that households might
be forced to deleverage in the face of tighter financial and
economic conditions.

It said, however, Canada should avoid a housing crash like
the one recently experienced by the United States.

While praising a sound banking system that helped Canada
weather the global recession better than many of its
industrialized peers, the IMF noted that Canadian banks are not
immune to financial troubles abroad and that the low interest
rate environment would make profit growth challenging. It also
called for further steps to build on the strength of the
financial system.

The agency also warned that the low interest rate
environment would weigh on the non-bank sector such as pension
funds, which may require higher contributions.

Earlier this week, Canada's finance minister agreed to set
economic benchmarks for expansion of the country's public
pension system in the future, but said the economy was too weak
now to demand bigger contributions from businesses and workers.

The report said the government should continue to address
long-term spending pressures. It said that Ottawa's plans to
balance the budget by 2015 are "well within reach," but that
deficit-cutting may prove more difficult for some of the largest
provinces. In the event of big negative shocks from abroad, the
IMF recommended the federal government to consider more fiscal
stimulus.

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